TIMING EXITS: ENTREPRENEUR'S EXIT AND INVESTORS EXIT
Startup entrepreneurs as well as startup investors generally do not spend a lifetime in the same startup. It is better for both groups to understand and agree on expectations and plan accordingly.
Entrepreneurs in most cases have a clear long-term vision as to what their venture is to achieve. Those with leadership skills usually stay the course. The most valuable and robust technology businesses are the ones whose founders are still at it 20 years after creating their venture. Value creation goes in parallel with wealth creation, though it has not been intuitive recently among some high-profile unicorns.
Entrepreneurs should understand if and when the fast-growing business they created will outlive their own involvement. The extremely talented ones adapt to new circumstances and scale. They grow with their respective enterprises to build empires. Others, willingly or not, either leave the business they started, or accept to work alongside a new team, relinquishing the helm to a professional CEO. A third group of founders, more likely the majority, ponder their exit at a time when the value from their contribution is at its peak. Often, the last group goes on to founding another venture, hence the “repeat entrepreneur” label. Savvy boards of directors are instrumental in helping in the decision process. To be effective, egos must not hinder the smooth transition to a new stage. Every participant will benefit from the pursuit of value maximization.
Investors, on their side, are rarely accompanying founders for a long period. Institutional investors, such as venture capital funds, have exit constraints due to the life of their investment vehicle, regardless of the ongoing success of their investment. Organizing the exit for investors is an orderly process requiring careful anticipation.
Startup founders who operate in capital intensive industries, more than others, are faced with a challenging situation. Capital intensive businesses generally have a long development process that precludes the generation of an early significant cashflow. Their horizon conflicts with the average horizon of a venture capital fund.
There are multiple options to consider, from buying out investors to listing the company shares on an exchange.
- Buying out investors: this is a rare occurrence, yet it is the goal that fits best the vision of entrepreneurs with a long project. Because shares are not liquid at that stage, the buy-out can only happen by finding another group of investors to replace the initial investors. It is not easy, though feasible. The emergence of a secondary market for venture capital at the beginning of the previous decade has allowed venture capital investors to liquidate their investment at the appropriate time, according to their objectives.
- Consolidation with other companies in the same industry (multiple mergers): this is very rare in tech startups, as their market is not mature enough to warrant such an alliance. Competition remains fierce until the growth of the market nears the growth of the GNP. Then consolidation starts to make sense.
- Listing on an Exchange (IPO); this remains the Holy Grail for entrepreneurs. As most markets worldwide have relaxed the rules regarding traditional financial criteria to qualify for a listing, they opened a wide door to allow public investors to participate in high-technology companies at an earlier stage than previously offered, though at a higher level of risk than in the past.
- Selling to a big corporation. This will not guarantee that the entrepreneur vision will be executed by the acquirer. If history is any indicator, it is rather the death of the founders’ vision.